Shaw’s deal for Wind leaves investors cold, but CEO says he’s in it for the long haul

Brad Shaw expected the marketplace to be pleased about his company’s decision to go in the lucrative wireless business by acquiring Wind Mobile Corp. in a transaction worth $1.6 billion.

Instead, investors dashed for the exit Thursday.

Class B shares of closely held Shaw Communications Inc. tumbled roughly eight per cent to $24.83 in Toronto, falling as much as nine per cent at one point within the day.

The acquisition triggered a broader sell off in the sector, with Telus’s shares falling 6.8 per cent, BCE Inc.’s declining 2.5 percent and class B shares of Rogers Communications Inc. sinking 5.5 percent. The benchmark S&P/TSX Composite Index was also within the negative, dropping 1.1 per cent.

Many of the Bay Street analysts who cover Shaw were singing a much more pleasant tune.

“We view this transaction like a strategic game changer for Shaw,” wrote analysts at RBC Capital Markets.

Macquarie analysts had valued Wind in the $1.9-billion range and saw this deal to be a positive for Shaw in long term. “We like the Wind asset,” they said.

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Maher Yaghi, an analyst at Desjardins, wrote in a note that “Shaw has accelerated its wireless entry in the market with a couple of years making it better quality.”

By buying Wind, Shaw adds cell phone services to the product mix, which already includes TV, Internet and home phone, boosting the Calgary-based cable company’s ability to compete against chief regional rival, Telus.

The deal gives Shaw 940,000 wireless subscribers who generated typically $35.81 per month in sales for Wind in the third quarter. Then, there’s Wind’s chest of valuable spectrum licenses, both used and unused, and 300 stores. The majority of them are in Ontario, a vital market by which Shaw lacks a real presence.

The company isn’t new to mobility. In 2008, it bought licences to coveted wireless spectrum and began to build out infrastructure in 2010.

But a strategic review this year figured the cost of doing this and the operating losses that would follow whether it started offering services in B.C. and Alberta would cost Shaw at least $2 billion. As a result, it changed its strategy and sold those licences in July.

“By acquiring a company that already includes a firm foundation, including spectrum, management expertise and scale, we’ve significantly lowered our chance of entry and also have done so in a disciplined and prudent manner,” Shaw told analysts Thursday.

“It enables us to build up a best-in-class converged wire line and wireless network,” he added, talking about Shaw’s extensive Wi-Fi and fibre footprint in Western Canada.

But there’s a lot Shaw hasn’t yet said, that is what could be making investors jittery about its prospects.

It won’t disclose just how much it expects in order to save in costs when the two companies integrate by eliminating duplicates.

It won’t elaborate on how much of the $1.6-billion figure is debt that it will assume and just how expensive is cash that’ll be repaid to Wind’s shareholders, the non-public equity syndicate that recapitalized the Toronto-based company last September for about $300 million, with around half of that being debt.

Then, there’s how Shaw plans to purchase this. It has taken out a bridge loan that finances the transaction fully. However, many have questioned how the company covers this debt while keeping an investment-grade credit rating.

Shaw has stated it’s open to selling assets C real estate included C and issuing new shares, which would have a dilutive effect. Yield-hungry investors will even wonder what this can mean to the dividend.

Despite the short-term sell off, Shaw says it’s inside it for the long haul. Wind plans to develop a faster, more reliable LTE network in 2017, which will allow Shaw to raise prices and compete from the larger players.